Student center

How America’s student debt crisis began – and how it might end | US student debt

American students have a debt problem. A big. More than 45 million Americans – more than the population of California – now owe a collective student debt of $1.7 billion.

What to do with this debt has become a hot political question as the midterm elections approach.

The vast majority of the money is owed to the federal government, which has directly supported or provided student loans for higher education since 1958. Although student loans are not new to the United States, the amount of student debt has more than tripled in the last 16 years.

The Biden administration recently hinted that some form of student debt cancellation may be announced soon — specifically, cancellation of at least $10,000 of student debt for Americans earning less than $125,000. per year. With this threshold, most student borrowers will qualify for debt forgiveness.

If executive action is taken, it will be the first major debt cancellation by the federal government to address the student debt crisis. To understand the impact of such a dramatic policy, one must unpack the student debt crisis, starting with its origins.

How the student debt crisis started

In 1957, the Soviet Union successfully launched the first satellite into Earth orbit, Sputnik. As the Cold War raged, the federal government feared that the American education system was producing enough scientists and engineers to rival the Soviets, and in 1958 began providing student loans through the National Defense Education Act.

Nearly a decade later, the Higher Education Act of 1965 allowed more people to take out loans, with the federal government promising to reimburse banks for any defaulted loans.

“It all started with this choice, which I think was a terrible choice, to decide that as a policy we should support higher education… by giving [students] an opportunity to get a loan,” said Dalié Jimenez, law professor and director of the Student Loan Law Initiative at the University of California, Irvine. “It was just a terrible mistake.”

Beginning in 2010, the federal government began lending money directly to student borrowers. Following the Great Recession, the amount of student debt began to rise rapidly. Colleges were seeing an increase in enrollment as people left the workforce to return to school. States have cut their higher education budgets, leading to higher tuition fees. More and more students were turning to for-profit colleges, which tend to be more expensive than public colleges.

In recent years, the amount of non-reimbursable aid has increased. Yet despite this appearance of increased financial support for students to attend college, the cost of attendance has remained the same.

Two line graphs comparing the difference between the listed price and what it actually costs to attend public and private non-profit institutions.

The cost of attending a public college has actually increased at a higher rate than the cost of attending a private college. The net cost of attending public four-year colleges, which takes into account grants students receive, rose from $17,500 in 2006 to $20,210 in 2016, according to College Board data.

Line graph of public and private non-profit costs increasing then decreasing slightly between the 2006-07 and 2020-21 school years.

“That era 10 years ago was a really formative time to produce a lot of debt that’s still there,” said Kevin Miller, associate director of higher education at the Bipartisan Policy Center’s Economic Policy Project. “The cost of college attendance has risen a lot while household incomes in the United States have not risen…there is a real feeling that if grants, the state, or institutional aid are not filling the void , that just leaves debt as the only option. ”

What student debt looks like today

For the 2021-2022 school year, the average cost of tuition and fees for a four-year public college is $10,740. The cost is nearly quadrupled for private institutions, to an average of $38,070. Even with subsidies, the cost of attendance averages $19,230 for public schools and $32,720 for private schools.

Estimates put the average debt of those in the Class of 2019 who took out student loans at $28,950. This figure is close to the maximum of $31,000 that students who are dependent on parents or guardians can borrow from the federal government to fund their undergraduate studies.

Area chart of the increase in student debt from the first quarter of 2006 to the first quarter of 2022.

Persistent racial disparities in wealth are reflected in the question of who should take out loans to fund college. About half of black students take out student loans, compared to 40% of white students. Black Americans owe an average of $25,000 more than their white counterparts and are more likely to fall behind on their payments.

Despite the amount of debt many students must take on to attend college, nearly 20 million Americans still enroll in college each year. Although earnings may depend on a person’s industry, those with a bachelor’s degree earn 75% more over their lifetime than those with only a high school diploma.

“The message is that you need to get a college degree. It’s not just a rhetorical message, it’s a real truth that if you don’t have a college degree, especially if you’re black or brown… you won’t be able to get a better job than your parents did” , Jimenez said. .

Those with graduate and professional degrees earn even more, but the price of a higher degree is even higher. A good portion of student debt – around 40% – is held by those who took out loans to pay for their higher education.

What the government has done to fix student debt

The most significant student debt policy was first implemented by the Trump administration, which suspended student loan repayments and interest accrual at the onset of the Covid-19 pandemic. Both Trump and Biden have extended the hiatus for the past two years, and it is now set to expire on August 31.

Since the start of this year, Biden has announced a slate of additional policies alongside the extended hiatus. Those who have defaulted or are behind on their federal student loans will be restored to good standing. Biden forgave $415 million in student debt to borrowers who attended predatory, for-profit schools.

His administration also announced changes to the Civil Service Loan Forgiveness Program, which forgives student loans for borrowers who are nonprofit and government employees after 10 years of debt or after 120 payments. More than 113,000 borrowers with a cumulative debt of $6.8 billion are now eligible for forgiveness. Over the years, the program has been the subject of much criticism, as relief through the program was scarce and borrowers were often deemed unqualified for logistical reasons.

The Debt Cancellation Debate

Even though it looks like Biden is ready to forgive some of his debt, the idea has drawn some criticism in recent months.

Republicans have used student debt as a talking point against Biden as the midterm elections begin to roll.

Senator Mitt Romney has suggested that Democrats’ student loan cancellations are a way to bribe voters. “Other kickback suggestions: Cancel car loans? Cancel credit card debt? Forgive mortgages?” he wrote on Twitter. JD Vance (who went to Yale Law School) said to the Washington Post that “Biden basically wants blue-collar workers like truckers — who haven’t had the luxury of going to college to get drunk for four years — to bail out a bunch of upper-middle-class kids.”

The reality is that student loans from those in the highest income quartile—those earning more than $97,000—account for a third of all outstanding student debt. But many low-income Americans also have student debt, although the amount of debt they have is less. Those earning less than $27,000 a year make up 17% of all borrowers, but their loans make up 12% of total debt outstanding.

An income threshold could be a way for the government to target forgiveness to those who need it most. But some have pointed out that an income cap does not take into account a person’s wealth.

“You look at a snapshot of your income this year or last year, that tells you very little,” Jimenez said. “If your family has no wealth, you’re in a very different situation than someone who has family wealth or personal wealth from previous careers.”

Those who have advocated for the cancellation of student debt say that $10,000 in forgiveness will not be enough to deal with the scale of the crisis. Democratic lawmakers, including Senate Majority Leader Chuck Schumer, Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez, have called on Biden to rescind up to $50,000.

“I don’t believe in a threshold, especially for so many frontline workers who are drowning in debt and would likely be excluded from aid,” Ocasio-Cortez told The Washington Post. “Cancelling $50,000 of debt is where you really make a dent in inequality and the racial gap. $10,000 is not.

Ending the student debt crisis for good

Even if Biden forgives some student debt, prospective students will continue to take out loans — and at higher interest rates. Tackling the price of college will come with its own complications, but proponents say it will be necessary to ensure student debt doesn’t get worse.

While Biden’s plan for a free community college was killed off with the rest of the social and climate spending bill making its way through Congress, some push for better funding for colleges is underway at the grassroots level.

In March, the governor of New Mexico signed a bill that would use $75 million in public funds to cover undergraduate tuition and fees at two- and four-year colleges. Campaigns for similar government support have been seen in Pennsylvania, California and Maine.

“The cost of a college education is too high for many students to get by without going into debt. Getting students to go debt-free or take on less debt in the first place is the thing we really need to focus on,” Miller said. “And the next generation or the one after?”